DR.

RAM MANOHAR LOHIA NATIONAL

LAW UNIVERSITY

2018

Taxation Law

“Clubbing of Income”
SUBMITTED TO: SUBMITTED BY:
Dr. Bhanu Pratap Singh Utkarsh Kumar Prajapati
Assistant Professor (Law) Enrolment number: 150101151
Dr. Ram Manohar Lohia 7th Semester
National Law University,
Lucknow.
 ACKNOWLEDGMENT

I have taken efforts in this project. However, it would not have been possible without the kind

support and help of many individuals. I would like to extend my sincere thanks to all of them.

I would like to extend my sincere thanks to my teacher and Mentor, Dr. Bhanu Pratap Singh

for his able guidance and help. All through the exploration period, I have been guided by my

educator at whatever point I confronted any obstacles or was in a state of daze not having the

capacity to resolve the intricacies of the subject.

I would also like to express my special gratitude and thanks to my seniors for sharing their

valuable tips and my classmates for their constant support.

 Table of contents

1- Introduction - defining clubbing of income.

2- Transfer of income without transferring of assets (section 60).

3- Revocable transfer of assets (section 61).

4- When an individual is Assessable in respect of Remuneration of spouse.

5- Income from assets transferred to spouse [Section 64(1) (IV)].

6- Income of assets transferred to a person for the benefit of spouse. Section 64(1) (vii)

7- Income of minor child section 64(1) (A).

8- Clubbing of negative income.

9- Conclusion

10- Bibliography
 1- Introduction - defining clubbing of income

Generally an assesse1 is taxed in respect of his own income. But sometimes in some
exceptional circumstances this basic principle is deviated and the assesse may be taxed in
respect of income which legally belongs to somebody else.

Earlier the taxpayers made an attempt to reduce their tax liability by transferring their assets
in favour of their family members or by arranging their sources of income in such a way that
tax incidence falls on others, whereas benefits of income is derived by them.

To counter such practices of tax avoidance, necessary provisions have been incorporated in
sections 60 to 64 of the Income Tax Act. Hence, a person is liable to pay tax on his own
income as well as deemed income2. Inclusion of other’s Incomes in the income of the assesse
is called Clubbing of Income.

2- Transfer of income without transferring of assets (section 60)

Section 603 is applicable if the following conditions are satisfied: -

1- The taxpayer owns an asset.

2- The ownership of asset is not transferred by him.

3- The income from the asset is transferred to any person under a settlement, trust,
covenant, agreement or arrangement.

4- The above transfer maybe revocable4 or may not be revocable.

5- The above transfer maybe affected at any time. If above conditions are satisfied,
INCOME FROM THE ASSEST IS TAXABLE IN THE HANDS OF TRANSFEROR5.
ILLUSTRATION-

Mr. Singh owns Debentures worth Rs. 50,00,000 of Ambaani & sons. Ltd., (annual) interest
being Rs.5,00,000. On April 1, 2017, he transfers interest income to Mr. Khan, his friend,
without transferring the ownership of these debentures. Although during 2017-18, interest of
Rs.500,000 is received by Mr. Khan, it is taxable in the hands of Mr. Singh as per Section 60.

1
An Assesse may be any individual liable to pay taxes for himself or to pay tax on behalf of somebody else.
2
Income belonging to others on fulfilment of certain conditions
3
Section 60 of income tax act, 1961.
4
Right to re-acquire or take back anything legally which was given earlier under an agreement or settlement.
5
The person who transfers any of his belongings, specifically his assets/income to another person is known as
transferor.
 3- Revocable transfer of assets (section 61)

If an asset is transferred under a “revocable transfer”, income from such asset is taxable in the
hands of the transferor. The transfer for this purpose includes any settlement, trust, covenant,
agreement or arrangement.
In any of the following cases, transfer is treated as “revocable transfer” –

1. If an asset is transferred under a trust and it is revocable during the lifetime of the
beneficiary.
2. If an asset is transferred to a person and it is revocable during the lifetime of transferee.
3. If an asset is transferred before April 1, 1961 and it is revocable within six years.

4. If the transfer contains any provision to re-transfer the asset (or income therefrom) to
the transferor directly or indirectly, wholly or partly.

5. If the transferor has any right to reassume power over the asset (or income therefrom)
directly or indirectly, wholly or partly.

CONSIDER THE FOLLOWING CASES-

1- X transfers a house property to a trust for the benefit of A&B. However, X has a right
to revoke the trust during the lifetime of A and/or B. It is revocable transfer and
income arising from the house property is taxable in the hands of X.

2- X transfer a house property to A. However, X has a right to revoke the transfer during
the lifetime of A. it is a revocable transfer and income arising from the house
property is taxable in the hands of X.

3- X transfer an asset on March 31, 1961. It is revocable on or before June 6, 1964. It is

a revocable transfer. Income arising from the asset is taxable in the hands of X.
conversely, if X transfers an asset before April 1, 1961 and it is revocable after 6
years (say, on April 10, 1968), it is not taken as a revocable transfer.

4- X transfer as asset. Under the terms of transfer, on or after April 1, 1998, he has a
right to utilize the income of the asset for his benefit. However, he has not exercised
this right as yet. On or April 1, 1998, income of the asset would be taxable in the
hands of X, even if he has not exercised the aforesaid right.

5- X transfers an asset. Under the terms of transfer, he has a right to use the asset for the
personal benefits of his family members whenever he wants. Till date, he has not
 exercised the right. It is revocable transfer. The entire income from the asset would be
taxable in the hands of X.

4- When an individual is Assessable in respect of Remuneration of spouse.

Section 64(1) (ii) is applicable if the following conditions are satisfied –

a- The taxpayer is an individual.

b- He/she has a substantial interest6 in a concern7.
c- Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-
mentioned concern.
d- Spouse is employed in the concern without any technical or professional knowledge
or experience. If the above conditions are satisfied, then salary income of the spouse
will be taxable in the hands of the taxpayer.
ILLUSTRATION-

X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical
or professional qualification to justify the remuneration.

In this case, salary income of Mrs. X shall be taxable in the hands of X .Where both the
husband and wife have a substantial interest in a concern and both are in receipt of the
remuneration from such concern both the remunerations will be included in the total income
of husband or wife whose total income, excluding such remuneration, is greater.

5- Income from assets transferred to spouse [SEC. 64(1) (IV)].

Income from assets transferred to spouse becomes taxable under provisions of section 64 (1)
(IV) as per following conditions:-
a- The taxpayer is an individual.
b- He/she has transferred an asset (other than a house property).
c- The asset is transferred to his/her spouse.
d- The transfer may be direct or indirect.

6
An individual is deemed to have substantial interest, if he/she (individually or along with his relatives)
beneficially holds equity shares carrying not less than 20 per cent voting power in the case of a company or is
entitled to not less than 20 percent of the profits in the case of a concern other than a company at any time
during the previous year.
7
Concern could be any form of business or professional concern. It could be a sole proprietor, partnership,
company, etc.
 e- The asset is transferred otherwise than (a) for adequate consideration, or (b) in
connection with an agreement to live apart.

f- The asset may be held by the transferee-spouse in the same form or in a different
form.

If the above conditions are satisfied, any income from such asset shall be deemed to be the
income of the taxpayer who has transferred the asset.

ILUSTRATION-

X transfers 500 debentures of IFCI to his wife without adequate consideration. Interest
income on these debentures will be included in the income of X. Section 64 is not applicable
in the following cases:
1) If assets are transferred before marriage.
2) If assets are transferred for adequate consideration.
3) If assets are transferred in connection with an agreement to live apart.
4) If on the date of accrual of income, transferee is not spouse of the transferor.

5) If property is acquired by the spouse out of pin money (i.e. an allowance given to the
wife by her husband for her dress and usual household expenses).

In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the
hands of the transferor.

6- Income of assets transferred to a person for the benefit of spouse. Sec. 64(1) (vii) 8
Income from assets transferred to a person for the benefit of spouse attract the provisions of
section 64 (1) (vii) on clubbing of income. If:
a- The taxpayer is an individual.

b- He/she has transferred an asset to a person or an association of persons. • Transfer

may be direct or indirect.
c- Asset is transferred for the immediate or deferred benefit of his/her spouse.
d- The transfer of asset is without adequate consideration.

If the above conditions are satisfied then income from such asset to the extent of such benefit
is taxable in the hands of the taxpayer who has transferred the asset.

8
Sec. 64(1) (vii) of income tax act, 1961.
 7- Income of minor child section 64(1) (A)9.

All income which arises or accrues to the minor child shall be clubbed in the income of
his parent (Sec. 64(1A), whose total income (excluding Minor's income) is greater.
However, in case parents are separated, the income of minor will be included in the
income of that parent who maintains the minor child in the relevant previous year.

When clubbing is not attracted- the following income will be taxable in the hands of
minor child:

1) Income of minor child (from all sources) suffering from any disability of the nature
specified under sec. 80U.
2) Income of minor child on account of any manual work.

3) Income of minor child on account of any activity involving application of his skill, talent
or specialized knowledge and experience.

8- Clubbing of negative income.

If clubbing provisions are applicable and income from such a source is negative it will still be
clubbed in the income of assesse. Consider the following cases:

1. Mr. X gifts Mrs. X Rs.2 lakhs from which she starts a business. Now as per clubbing
provisions whatever is the profit from this business it will be taxable in the hands of Mr. X.
Since it is an income taxable under the head ‘Profits & gains of Business & profession’ that is
why it will be taxable under the same head and income will be calculated as if it is the
business of Mr. X.

2. Minor son of Y has a business. For the previous year 2014-15, loss from business is
Rs.20,000. The loss of 20,000 will be included in the income of Y or Mrs. Y whosoever has
higher income.

9
Section 64(1) (A) of income tax act, 1961.
 9- Conclusion
The following conclusions can be drawn out of clubbing of income under income tax act,
1961-
Talking about section 60 (transfer of income without transfer of asset) and section
61(revocable transfer of asset), there is an asset which is transferred under a “revocable
transfer”. Income from the aforesaid asset is taxable in the hands of transferor. Such income
is taxable as and when the power to revoke arises. This rule is applicable even if the power to
revoke has not been exercised so far.

Clubbing of income in a broad aspect plays a crucial role in collection of revenue via. Income
Tax. The provisions are very much suitable to prevent any partiality and hence secures the
article 14 of the constitution of India (right to equality) by not differentiating between a
person earning 15 lakhs per annum and a couple who earns 8 and 7 lakhs per annum. By
virtue of the section 60 to 64 of income tax act, 1961 both have to pay equal taxes to the
government.

10- Bibliography

a- https://taxguru.in/income-tax/ppt-clubbing-income-income-tax-act1961.html
b- http://www.arkayandarkay.com/a-guide-to-clubbing-of-income-in-india/
c- http://www.simpletaxindia.net/2012/07/clubbing-of-income-individual-section.html
d- http://yourfinancebook.com/what-is-clubbing-in-income-tax-section-64-of-income-
tax-act/